As a follow-up to our earlier post where we had talked about our first securitisation in the Commercial Vehicle (CV) Finance space, in this post we briefly provide an overview of the industry and discuss the key risk factors affecting the CV industry along with factors that impact the performance of a portfolio of CV loans.
Overview
Commercial Vehicle (CV) industry in India has surged over the past decade and the market is expected to grow at a CAGR of over 15% until 2016 (Source: Society of Indian Automobile Manufacturers (“SIAM”)) with many companies competing to expand. Commercial vehicle is a type of motor vehicle that is used for transporting goods or carrying passengers with former contributing around 87% in India. Commercial vehicles are classified into Light, Medium & Heavy depending upon its gross vehicle weight. The CV industry enables quick, easy departure of goods and accepts smaller loads than railways and also commercial vehicles can access remote and hilly areas where rail lines cannot be constructed.
The main growth drivers for CV Industry are modernisation of the trucking industry, structural shift to Hub & Spoke model, improved road infrastructure, growing freight capacity and increase in exports from remote areas enabling the producers/manufacturers to move their goods to ports. The key risk factors for this industry are low freight demand and truck rentals, non-availability of cargos, fuel price, risk prone area of occupation, sudden transport strike, competition with alternate mode of transport (Railways) and any new government regulations related to restrictions based on age of the vehicle and other environmental safety issues. Also, recent study on CV industry by ICRA found that the India’s GDP and IIP numbers are very closely correlated with the development of Commercial Vehicle Industry, which in turn has made this industry the lifeline of Indian Economy.
CV Financing and Securitisation
CV Financing Industry in India has seen an impressive growth and in the last five years till 2012-13, CV loan disbursements grew by around 11 per cent (Source: CRISIL Research, Retail Finance- Auto, June 2013). Major players in CV Financing in India are Tata Motors Cholamandalam Finance, Sundaram Finance, AU Finance, Shriram Transport Finance, Magma, L&T, M&M and Religare. The key factors that could impact vehicle financing in India are growth in vehicle sales, finance penetration and average ticket size (players offering marginally higher LTV because of competition from other players). The process of pooling the loans given by these CV financiers and selling the securities backed by cash flows from the loans to investors is termed as ‘Securitisation’ of CV pools and the bank or finance company that has originated the pool of receivables/loans is termed as ‘Originator’. While selecting the loans for securitisation, Originator should take into account the factors such as loan tenure, Interest rates, vehicle type (LCV/UCV), geographical diversity, recovery rates, etc.
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Risk Factors affecting the CV portfolio performance
We performed a small study to identify the factors that significantly affect the Securitised CV pool performance (delinquencies) and have illustrated the way in which these factors affect the delinquencies.
Data was collected from the Pool Performance reports (from Jun’ 08 to Dec’12) published by Rating Agencies (CARE, ICRA and CRISIL) with a total number of 194 transactions of 14 different Originators. The factors, which could affect the pool performance, were identified based on three broad categories such as Transaction Details, Initial Pool Details and Pool Performance Details. Once data and factors were identified, regression of these factors with 90+ and 180+ delinquencies was performed and the significance level of factors affecting the delinquencies was observed.
We found that originators have greater impact on delinquencies than any other factor. This implies that the characteristics and business model of originator seems to be the most important deciding factor for the CV pool performance. Even though none of the coefficients of other pool parameters are found to be significant, certain parameters like presence of new CV (NCV) in the pool, weighted average seasoning of the pool and ticket size of the loans seem to have positive impact on pool performance. However, the single regression results do not consider the inter dependencies between the factors. For example, presence of NCV in the pool and high-ticket size of the loans can go hand in hand. Further, an originator may spend significantly more effort in the credit evaluation of a high-ticket loan resulting in better origination.
Below a detailed presentation of the study:
